Many firms view practice development as a one-client-at-a-time process. However, the same time and energy expended to get one client could be redirected into a merger effort and net many new clients. This acquisition could add $250,000 annually in one clean sweep.

The strategy includes a targeted geographic search of small CPA firms to buy, merge, establish a practice continuation plan, or strategically align with for services they cannot provide.

You may think this strategy is only for larger firms. Not true! Firms with ten or fewer professionals can successfully grow their practice this way. In fact, “smaller” small practitioners prefer to sell to a small firm because they feel it is a better fit for their clients.

The key to utilizing this strategy successfully is to understand how a merger candidate fits with your firm. There is a significant difference between a $500K firm purchasing a $150K practice, and a $5M firm purchasing the same smaller practice.

With the larger firm, the transitioned clients will likely lose the personalized service they have experienced. Rates likely will be increased to accommodate the new billing structure. These factors alone make a transition difficult.

However, consider the same issues with the $500K firm. Personalized service and higher billing rates are less of an issue. The $500K firm will have the time and resources available to provide the service these clients are accustomed to. 

The better the fit, the smoother the transition will be. Start by defining your expectations. What is the ideal match for your firm? 

Do you want an additional partner or to purchase a practice outright? The answer will shape the direction and length of the effort. If the goal is to purchase a practice, then the prospect pool is narrowed significantly. Many firms are open to the idea of merging and continuing to work. 

However, finding a practice to buy requires identifying someone who is ready to retire, wants out of the profession or has health issues and cannot continue to practice. These opportunities are a matter of timing. Every year a smaller CPA in your area wants to get out or has to leave due to a health reasons. It is just a question of being there at the right time. 

Should the target be a sole proprietor or a two- to four-firm? Targeting a larger firm usually means you will have to take on additional partners. Sticking with a one-person firm means only one owner to negotiate with. 

What type of work fits your firm’s expertise? Tax and write up? Audit? Payroll? When searching, be aware of opportunities to sell additional services to new clients. If you are an audit firm or sell investments, and the target does not provide these services or has not worked the client base, how much more in fees can be generated? The $250,000 target can become a $350,000 acquisition after you have worked it. 

Do billing rates match? Purchasing a practice that charges less for the same services is a poor idea. It will drain resources and divert attention from the clients you want. The key issue to discuss is billing rates. Dig into the numbers as they can reveal a lot. For example, if a firm does $150,000 yearly (1,000 hours at $150), you have to wonder what is being done with the other 1,000 hours? This can be a sign of write-offs or flat fee pricing that can turn the $150 into $75 per hour. Billing rates are the biggest deal breaker – investigate them first. 

When does the lease on their office expire? How much time is left on the lease is important. It can affect when the acquisition will happen, or the cost of the acquisition if it cannot be broken. Have their clients come to your offices as early in the process as possible. This gets them familiar with new faces, the location and the environment. 

What will be the length of the transition period? How long does the acquired partner want to continue working? Do they want to stay for six months or five years? One tax season is recommended to make the relationship transfer. This is important to clarify, because an arrangement without a written end date is not ideal. 

How do you pay for the firm? There are a variety of ways to structure a purchase. Generally, there is an upfront cash payment with the balance paid over a three- to five-year period. Paying all cash up front for a practice is very risky. It exposes you to liability, and in the long run could leave you paying more for the practice than can be billed from it. 

Also consider production compensation. In addition to buying out the firm, you will need to include compensation for hours worked by the small practitioner during the transition period.

Answer these questions before the search begins. Inevitably, an opportunity will arise that will meet the criteria, but ultimately it may be a poor fit. Defining expectations ahead of time makes it easier to determine which opportunities will work and which will not. Be prepared to walk away from a bad fit.

Determining Value 

Determining what a practice is worth is not easy. The buyer wants to undervalue the firm and the seller wants to overvalue it. This happens because selling a practice is not just a business decision; it is emotional. 

People sell because of age, illness or desire to wind down and focus on other things. Whatever the reason, they see their firm as more than a business. Clients have become close friends and relationships are hard to sever. Sellers overvalue the practice because they see it in “years it took to build” as opposed to the current market value. 

The buyer has many issues to consider, including how much of the client base will leave. Since relationship changes are the number one reason clients switch CPA firm, a transition period is essential. You want clients to become comfortable with the new CPA firm. The erosion of clients, and consequently revenues, effects how much the buyer is willing to pay for a practice. 

One Way to Look at a $200,000 Acquisition:

A Smarter Way to View the Same $200,000 Acquisition: 

Remember these are just the numbers for the first year. In succeeding years, the profit will grow because the 15 percent down payment and transitional partner’s salary will be eliminated. 

Start Thinking Differently

Small changes in the formula can have a huge impact on the results of practice development in terms of new client acquisition. Begin looking outside the box.

The expense and effort to obtain a $5,000 client can be the same amount expended to acquire a $250,000 practice. The return on investment is huge if the right acquisition is identified. 

About the Author
Brian Swanson is a consultant at Visionary Marketing, which specializes in helping accounting firms develop marketing strategies to target new prospects, develop referral networks and increase existing client revenues. Contact him at 800.995.9186, or via e-mail at bswanson@ThinkVisionary.com.

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